Integrated Annual Review 2012 Annual Financial Report 2012 Mineral Resources and Mineral Reserves Regional overview  
 

2.2.2 2012 performance review

If one looks at the results for 2012, you will find that this was indeed a year of two contrasting halves.

During the first half the South African mines had a very steady performance, but in the second half they faced two significant challenges which, in a large part, caused Group attributable production to decline by 7% to 3.25 million gold equivalent ounces – below where we wanted to be.

The first significant challenge was a tragic fire that took place at the Ya Rona shaft at KDC during the third quarter – which resulted in the death of five employees and accounted for 30,000 ounces in lost production. The second was the industry wide illegal strikes in the South African mining industry which affected both KDC and Beatrix gold mines during the third and fourth quarters – accounting for 145,000 ounces in lost production. Had these two events not taken place, our production would have been similar to our 2011 performance (3.49 million ounces).

It is also frustrating to note that the events in South Africa in the second half of the year have obscured what was looking to be one of our key achievements for 2012 – the hard-won stabilisation of production at Beatrix and KDC during the first half of the year, when the production decline at these operations was arrested for the first time in eight years.

Our international operations reported a decline in attributable production for 2012 of 1% to 2.03 million golde-quivalent ounces from 2.04 million ounces in 2011. This was partly due to an expected decline in grade at Cerro Corona, as well as a reduction in production of Damang, as the mine transitions to new ore sources. But significant remedial actions saw a strong turnaround in operational performances during the second half of the year with the international operations increasing their combined managed production by 11% to 496,000 ounces in the December quarter.

Although our total cash cost rose from US$795/oz to US$894/oz, this reflected the impact of both the strikes and the fire – which reduced our production without having a commensurate impact on our fixed operational costs. Nonetheless, our cost controls have been strong in all of our regions, somewhat mitigating the impact of the events referred to above as well as the effect of general mining cost inflation.

These events also partly account for an increase in our Notional Cash Expenditure (NCE) from US$1,173/oz to US$1,376/oz and a decrease in our NCE margin from 25% to 17% – although we can also take into consideration the fact that 2012 marked the apex of our planned capital expenditure on our major South Deep project at R2.58 billion (US$315 million). From now on, this figure can be expected to fall.

Other factors that contributed to the lower NCE margin included an increase in the strip ratio at Tarkwa along with significant pre-stripping at Damang as we bring to account the mine’s Mineral Resource potential. In addition, significant capital was expended on the acquisition of a mining fleet linked to the conversion to owner-mining at the open pits at the St Ives mine.

Net attributable earnings for the Group amounted to R5.66 billion (US$691 million) in 2012, compared with net earnings of R7.03 billion (US$973 million) in 2011, while normalised earnings declined to R6.83 billion (US$834 million) for 2012 from R7.24 billion (US$1.00 billion) in 2011. A total dividend for the year of 235 SA cents was declared, compared with 330 SA cents in 2011.

The benefits of our performance go beyond the bottom line. Our total economic contribution in 2012 was US$4.23 billion (2011: US$3.77 billion), while we raised our socio-economic development spending from US$54 million to US$136 million in 2012.

CEO Nick Holland
CEO Nick Holland

Significant challenges during 2012

Labour unrest in South Africa

As with many mining companies operating in South Africa, 2012 has not been an easy year. The defining event was the wave of illegal strikes that struck the sector during the second part of the year – and the deadly confrontation between striking workers and the police at Lonmin’s Marikana platinum mine on 16 August 2012. This raised serious concerns about underlying social tensions and labour relations frameworks, not only within the mining sector – but in South Africa as a whole. As noted above, related strikes at our Beatrix and KDC mines resulted in the loss of around 145,000 ounces in production, raised the spectre of serious violence, and threatened to seriously undermine the existing Collective Wage Agreement (CWA) for the gold mining industry.

If there is a silver lining we can take away from these events, it is this: there were no fatalities, very few violent incidents and no damage to mine property at Gold Fields operations. Likewise, CWA endured without capitulation by the gold sector and everyone got back to work safely. This bears testament to the positive approach adopted by the majority of our employees, as well as the courage and sensitivity of our security personnel, for which they deserve our high praise.

It also reflects our consistent and clear message that, while the status quo clearly needs to change, such change can only take place on the basis of respect for the law, constructive engagement and the honouring of all existing labour arrangements.

We look forward to playing a part in this process – and to supporting the future of South African mining. We will do so by engaging positively and seriously with our employees, peers, unions and government – and by pressing ahead with our ongoing efforts to support transformation in South Africa. Importantly, we intend to use South Deep to demonstrate how modern labour models and employee engagement, advanced technology along with progressive remuneration and incentive arrangements can help secure a bright future for South African mining.

Safety and health

In addition to the strikes, the Ya Rona fire highlighted the ongoing nature of our struggle to achieve Zero Harm at our operations. The fire, which took place on 30 June 2012 in a worked-out area of the Ya Rona shaft and for which the circumstances and causes are still being established, resulted in the tragic death of five people. The cause of the fire may never be established due to the extensive damage.

The fire accounted for almost a third of our fatalities for the year taking our total fatalities for 2012 to 16. While this is still unacceptable, it is lower than the 20 fatalities we experienced in 2011.

I am pleased to say that we are making significant progress around our five key safety interventions which we launched in 2011, namely Engineering out risk; Compliance with standards and procedures; Cultural transformation; Alignment with stakeholders, particularly government and trade unions; and, Embedding our health and wellness programme (p87). As a result there have been some notable achievements at the South African operations during different points of 2012, including 3.5 million fatality free shifts (FFS) at the KDC East underground section, 2 million FFS for the whole of KDC and 3.5 million FFS at South Deep, which has gone over two years without a fatality. In addition, South Deep also achieved 6 million fall-of-ground (FOG) FFS.

During 2012, the prospect of a potential class action linked to silicosis and other occupational diseases became more real for a number of South African mining companies. In August 2012, a court application was served on a group of respondents that included both Gold Fields and Sibanye Gold, followed by a further court application in December 2012. These were made on behalf of mine workers, former mine workers and their dependents who allegedly contracted silicosis and/or other occupational lung diseases while working at the respondents’ operations. (p137).

Although the legal process is at a relatively early stage, it highlights both the potential liability faced by Gold Fields, Sibanye Gold and other mining operators in South Africa – as well as the need to ensure that we continue to make every effort we can to eliminate employee health risks. During 2012, we continued to install underground tip filters and tip doors to reduce dust generation and to carry out chemical spraying to suppress dust on the foot walls. In addition, we initiated mist-spraying along haulage routes to minimise the transit of dust, as well as real-time dust monitoring to enhance our risk management measures.

However, it is unlikely that we – or indeed the mining sector – can completely eliminate all risks. As a result, I continue to believe that where occupational health issues do occur, we in the mining sector should address them in a fair, transparent and supportive way.

Rising input costs

While our operations are making significant headway in controlling their costs, cost inflation caused mostly by external factors was a major challenge for our operations in all our regions. Net operating costs for the Group increased by 18% to R24.49 billion (US$2.99 billion) in 2012 from R20.77 billion (US$2.88 billion) in 2011, while Group Notional Cash Expenditure (NCE – which measures operating cost plus capital expenditure) was up by 33% to R362,331/kg (US$1,376/oz) from R272,224/kg (US$1,173/oz) in 2011.

Cost inflation was particularly noteworthy at our West African operations where net operating costs rose by 38% and at the South African mines where they increased by between 10% at KDC and Beatrix to 16% at South Deep, though the latter increase at South Deep has to take cognisance of the extensive development and staffing at the mine in anticipation of future growth targets. Operating cost rises at our Australian and Peruvian operations were between 15% – 20% during the year.

Key drivers behind cost inflation and reduced cash flow include:

  • A global mining and engineering skills shortage, resulting in higher labour costs. Wage inflation at Gold Fields last year was around 10.5% (p130)
  • General cost inflation around inputs, particularly energy, but also other materials
  • Rising tax burdens driven by resource nationalism (p151)
  • Declining ore grades across the gold mining industry, requiring larger investments in exploration
  • Unfavourable exchange rate conditions at our international operations

Higher costs are undermining much of the leverage gold mining companies would otherwise enjoy given higher gold prices. This is not always well communicated. In part, this is due to many companies reporting their operational cost rather than their ‘all-in’ costs (including, for example, expenditure on the ongoing replacement of finite Mineral Resources and Mineral Reserves). In reality, it is estimated that ‘all-in’ Notional Cash Expenditure (NCE) for the industry has doubled over the last five years. As a result, the profits being made by most gold producers are relatively modest – and remain contingent on continued increases in the price of gold.

Our cost reduction efforts have been focused on continuing work on a shift to owner operations at our Australian and Ghanaian mines as well as the ongoing Business Process Re-engineering programme at our Australian, Ghanaian and South African operations. We also launched two new initiatives last year, namely the ‘Fit-for-purpose structure’ at our mines and regions as well as the Ore Flow Reconciliation Project. These programmes are aimed at improving the margins per ounce of gold produced through cost savings and driving improved management of metal loss and dilution along the mining value chain. Details of these programmes are on p43 and p78.

Nonetheless, after considerable success in addressing our operational costs, further cost-reduction opportunities are becoming rarer. As a result, we are also focusing on the quality of (i.e. the return from) our production and growth projects, which has resulted in some cases in the downscaling of marginal production – to ensure we are able to maintain healthy margins.

In addition, we have instituted a salary freeze for our top managers during 2013, including the executive leadership.

Key achievements in 2012

Industry leadership on reporting transparency

For several years, we have led our industry in reporting transparency through our focus on Notional Cash Expenditure (NCE) and NCE margin. This ensures that we report all costs associated with our mining operations, including all operating costs as well as all capital. As a result, our investors can readily assess the true contribution of each of our mines and the impact of the actions we are taking to improve their cash generating capacity. The industry is now starting to embrace such reporting and we are currently developing an industry standard in this regard through the World Gold Council. This will help us more properly reflect what it costs to produce an ounce of gold. It is hoped that we can produce something substantive by the end of 2013. For far too long the industry has reported an inflated perspective of our profitability, which has contributed to governments and other stakeholders seeking a greater share of profits, which don’t necessarily exist.

South Deep

At South Deep, several significant milestones were reached in support of the build-up to full production of 700,000 ounces by 2016.

The first of these milestones was the completion, within budget and on time, of the fixed infrastructure installations required to support full production. These installations include the new ventilation shaft which was completed in the fourth quarter. The additional rock hoisting capacity provided by this shaft is planned to ramp up to a nameplate capacity of 195,000 tonnes per month by December 2013. Combined with the 175,000 tonnes per month capacity of the existing Main shaft, this is sufficient to sustain the full-production mill-feed of 330,000 tonnes of ore per month. The simultaneous completion of the gold plant expansion increased South Deep’s processing capacity from 220,000 tonnes per month to 330,000 tonnes per month.

Together with the new tailings facility, additional refrigeration capacity and backfill plant completed during 2012, South Deep now has the fixed infrastructure in place required to support full production.

The second major milestone at South Deep was the conclusion, in October 2012, of a landmark agreement with the National Union of Mineworkers (NUM), introducing a new operating model for the mine. At the core of the agreement is the introduction of a new 24/7/365 operational schedule which is in line with best practice mechanised underground operations world-wide. This is expected to provide an additional 23% face time which will drive the productivity improvements required for full production. The new operating model includes, inter alia, more competitive grading, remuneration and targeted incentives and seeks closer employee alignment with the mine’s business objectives. The implementation process has commenced but it will take some months for the impact of the new operating model to be noticeable. From now on, the main focus is on de-stressing and developing the ore body, and ramping up production at this world-class gold mine.

Once it reaches its production target of 700,000 ounces in 2016, South Deep will be the bedrock of the Gold Fields Group – and a shining example of how, with the right mining methodologies, technology and labour models, deep underground gold mining can thrive and prosper in South Africa. Indeed, once it becomes cash-generative (which could be in the latter part of 2013 depending on the gold price), this mine should play a key role in supporting our strong dividend policy of paying out between 25% and 35% of normalised earnings, as well as future efforts to grow and diversify our profitable production base around the world.

Portfolio Review

As an industry, gold miners have over the past few years had a poor track record in providing investors with a leveraged return over what they could attain from investing in gold directly. We are not materially growing ounces of production, despite spending billions of dollars on exploration as well as the development and acquisition of new mines. We are adding costs at a rate that detracts from gold price gains and we are not returning cash to shareholders at a rate that matches their expectations. As a result, gold industry share prices, including that of Gold Fields, have underperformed the gold price and have failed to reflect the decade-long gold bull market in their valuations.

This sobering analysis formed the foundation of my speech to the Melbourne Mining Club in July 2012, where I committed Gold Fields to a course of action to ensure we were doing everything within our control to generate greater cash returns for our investors. During the second half of 2012 we engaged in a comprehensive review and analysis of Gold Fields operating model as well as all of the assets in the portfolio – both producing mines and growth projects – to ‘give teeth’ to the principles I first put forward in the speech. The key outcomes of this review have fundamentally changed the structure of Gold Fields and the way in which it operates.

Exploration at Salares Norte, Chile
Exploration at Salares Norte, Chile

Unbundling of Sibanye Gold

The first and most significant outcome of the Portfolio Review was the decision to separate the Gold Fields portfolio of assets into two separate and independent companies, reflecting the diverse nature of the ore bodies, the relative maturity and profile of the assets as well as the different mining methods, management and operational skills, and technologies required to optimally and sustainably extract these ore bodies.

This decision led to the November 2012 announcement of the creation and unbundling to shareholders of the new Sibanye Gold as a totally independent company with its own dedicated executive management and board of directors, led by well-known and respected South African mining and business entrepreneurs, Neal Froneman (Chief Executive Officer) and Sello Moloko (Chairman).

The new Sibanye Gold, which comprises the KDC and Beatrix mines as well as the various South African service entities, was successfully listed on the JSE Limited on 11 February 2013 and the New York Stock Exchange on 18 February 2013.

I believe Sibanye Gold will be a strong, fit-for-purpose vehicle for the optimal and sustainable extraction of its substantial Mineral Resources and Mineral Reserves, as well as potentially a catalyst for the long overdue restructuring of the South African gold mining industry.

The unbundling of Sibanye Gold was not a quick or easy decision to make. Nonetheless, I believe that the decision to split our assets in this way will play an instrumental role in ensuring that Beatrix and KDC, as well as their respective workforces, continue to prosper well into the future. It was the right thing to do – for investors and employees.

However, despite the unbundling of Sibanye Gold, Gold Fields future remains firmly tied to that of South Africa through our world-class, developing South Deep mine.